7. A P/E ratio of 12 means a. Earnings per share is 12 times higher than price o
ID: 2636291 • Letter: 7
Question
7. A P/E ratio of 12 means a. Earnings per share is 12 times higher than price of the stock per share b. The stock is undervalued c. Investors are willing to pay $12 for every one of dollar of earnings d. The stock is overvalued 8. ABC stock is selling for $26 per share. Last dividend paid was St per share and dividends are expected to grow at a constant annual rate of 3% forever. Which of the following statements is correct? a. Dividend yield is 3.5% and total expected rate of return is 6.5% b. Dividend yield is 3.5% and total expected rate of return is 6% c. Dividend yield is 3.96% and total expected rate of return is 6.96% d. Dividend yield is 3.96% and total expected rate of return is 6.25% 9. ABC company's last earnings per share was $1.5 and it is expected that earnings will grow 4% next year. PIE ratio for ABC is expected to be IS. The stock is currently selling for $21. Which of the following statements is correct? a. ABC stock is overvalued by $2.4 and should be sold. b. ABC stock is overvalued by $3.4 and should be sold. c. ABC stock is undervalued by $2.4 and should be bought. d. ABC stock is undervalued by $3.4 and should be bought.Explanation / Answer
(7)The P/E ratio=12times, means Price/ Earnings= 12 times
Thus, the correct option is (c) Investors are willing to pay $12 per share for every one dollar of earnings.
It is because, If Earnings= 1, Price= 12
(8) Price= [Dividend * (1+ growth)] / (Re-growth)
=>26 = 1 (1+ 0.03) / (Re- 3%)
=> 26= 1.03/ (Re-3%)
=> Re-3%= 1.03/26
=> Re-3%= 3.96%
=> Re= 3.96% +3%= 6.96%
and Dividend yield= (Dividend/ Price) * 100= (1.03/26)*100= 3.96%
Thus, the correct option is (c)
(9) Expected Earnings= 1.5(1+0.04)= 1.56
P/E ratio= 15
Hence, Price= 15*1.56= 23.4
Whenever the stock is trading at a price more than the expected value, it is overvalued and it should be sold.
Thus, the correct option is (b).
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.